For many Americans, side hustles are essential. According to Bankrate's recent side hustle survey, Americans who work on the side earn an average of $810 a month. That means you could potentially earn close to $10,000 in additional income if you worked on the side all year long.
Starting a side hustle can help you reach your financial goals, like paying off debt or saving for a down payment on a home. However, if you are not careful, it can cause problems later on, especially when it comes to paying taxes. This is where a business bank account comes in handy.
Most people don't realize that a side hustle is more than something you do in your spare time. When you file your taxes and report your additional income, you may be in for a real surprise. Your side hustle could be an actual business, requiring additional work and a separate business bank account.
But how do you know when it's time to open a side hustle account? Here are six signs that you need a business-only account.
Important side hustle statistics
- More than one-third (39%) of U.S. adults have a second job. (Bank rate)
- 33% of people with a side hustle say they need extra money to pay day-to-day living expenses. (Bank rate)
- Other reasons cited for working a side hustle are having money for discretionary spending (27%), saving more (25%) and paying off debt (12%). (Bank rate)
- Many Americans keep side jobs long-term. 28 percent believe they will always need a side hustle to make a living, and 19 percent hope their side hustle will develop into their main source of income. (Bank rate)
- Self-employed individuals must file an income tax return if their annual net income totals $400 or more. (IRS)
How to open a business bank account
A business bank account is a special bank account designed for individuals engaged in business activities, including side jobs. This allows you to separate your personal and business finances, making it easier to track income and expenses related to your side hustle.
Those with a side hustle can use a business bank account to maintain accurate financial records, simplify tax filing, and project a professional image to clients and customers.
Opening a business bank account typically involves the following steps:
- Research different banks: Compare business bank accounts offered by different banks. Consider factors such as fees, transaction limits, digital banking options, and customer service. It is beneficial to choose a bank that offers customized services for small businesses and entrepreneurs.
- collect necessary documents: Requirements vary by bank, but commonly requested documents include personal identification, business documents (such as a business license), social security number (SSN) or employer identification number (EIN), and address. Contains proof.
- Go to the bank or apply online: Once you have gathered the necessary documents, you can either visit a bank branch and fill out the application form or apply online through the bank's website.
- Deposit initial funds: Some banks require an initial deposit to open a business bank account. The amount depends on the bank and account type you choose. Transfer the required funds to your new business account and activate it.
- Wait for verification and account activation: The bank will review your application and documents. Once approved, you will receive confirmation of your account opening, along with details such as your account number and any additional steps required to set up online banking.
Advantages and disadvantages of business bank accounts
| Strong Points | Cons |
|---|---|
| Separate personal and business finances | Additional charges may apply |
| Records management is simplified and report generation is more efficient. | Open typically requires more documentation and stricter standards |
| Provides access to business banking services such as business loans | Choices are more limited than with a personal bank account |
| Add professionalism and credibility to your side hustle | The funds in your account are within the same FDIC insurance limits as your personal account. |
Considering a business bank account
A business bank account can help you establish a more organized, professional, and growth-oriented approach to your side hustle. If any of the following situations apply to you, it may be a sign that it's time to open a business account.
1. It's more than just a hobby
One of the biggest indicators you need to separate your finances is when your side hustle becomes more than just a hobby.
“If you're consistently making money, that means you have a business,” says Joshua Zimmerman, managing partner at Westwood Tax & Consulting. However, this is not the only factor, as many companies do not become profitable until they have been in operation for several years.
To distinguish between a business and a hobby, the IRS recommends asking the following questions:
- Are activities conducted in an administrative manner?
- Is your side hustle profitable, or do you intend for the activity to be profitable and have the expertise to do so?
- Do you rely on income from your hobby for part of your living?
- Are the losses due to circumstances beyond your control or are they normal business start-up costs?
- Are you changing your methods to increase profitability?
- Have you profited from similar activities before?
- Can you expect the assets you use for your side hustle to increase in value and generate profits in the future?
How to read bank interest rates:
Example: If you knit and sell the items you make from time to time (which makes enough money to break even after taking into account the cost of materials), it is not a business because it does not bring in any profit or profit. Most likely it's a hobby. You can expect it in the future. However, if you complete a few trades a month and are actually making a profit, you may need to take additional steps.
“If you're actually making a significant amount of money from your side hustle, you should open a business bank account,” Zimmerman says.
2. I want to protect myself during an audit.
One of the biggest benefits of opening a separate business account is the protection it provides in the event of a tax audit.
Business accounts are helpful if you're audited because there's a clear line between business and personal spending.
— Joshua ZimmermanManaging Partner of Westwood Tax & Consulting
Ann audit Essentially, it is a thorough examination of your tax return to ensure that all reported expenses, sales, and income are accurate. Audits can be random or triggered by tax filing discrepancies or red flags. If you make a mistake, you may have to pay a penalty.
Small businesses are more likely to be audited than non-business interests, with 1.3% of businesses with annual revenue between $25,000 and $100,000 being audited, according to the IRS.
If your business's profits and losses are audited, the IRS can only see your business' bank statements. The IRS must specifically request access to your personal account in order to verify it, providing an additional layer of defense.
3. Benefit from streamlining tax payments
People who earn ongoing income from a side job may have to pay estimated taxes. If your side hustle functions as a business, you may need to pay both personal income tax and business income tax. If all your income and expenses go through your personal accounts, paying your quarterly taxes can be a hassle. That's because it can be difficult to know exactly how much you earn or how much you spend. Business accounts help streamline things.
“Separate business accounts make it very easy to track your income and expenses,” says Zimmerman.
When it's time to pay your taxes, simply checking your business bank account statement will give you a snapshot of your income and expenses. You can also easily find expenses that are tax deductible.
4. I want to earn compensation as a business expense.
When you have a side hustle, you're probably always looking for ways to cut costs and increase your income. With a business credit card, you can get discounts and benefits that you can't get with a personal credit card. For example, business cards often offer discounts on office supplies, shipping, and even travel expenses.
Other benefits of having a credit card for your business include:
- Loan facility available when needed
- Earn cashback, points, and miles
- Detailed monthly expense statement
- Access to business-specific features such as business expense management tools
- cash flow buffer
Business credit cards are also a great way to help you transition from a side hustle to a small business. Using business credit cards responsibly can help establish and build a business credit history. A strong credit history gives you access to higher credit limits, better financing terms, and other important financing opportunities as you expand into a larger business.
Bankrate has researched hundreds of small business credit cards to find the right one.
Five. Ready to accept debit and credit card transactions
More and more people are only using debit or credit cards to purchase goods, rather than cash or checks. According to the Federal Reserve, credit and debit cards accounted for 57% of all purchases in 2021. Without the ability to accept plastic, you could be missing out on sales.
While there are tools that can be used to sync to your personal account, they often come with a hefty price tag for that privilege.
Many banks and credit unions offer discounts on credit or debit card processing fees to account holders with business checking accounts. For sales-based side hustles, the ability to accept credit and debit cards can help increase sales and profits.
6. I want to look more professional
Having a separate bank account with checks designed specifically for your business creates a more polished and professional image than writing checks from your personal account, and helps your business be taken more seriously. Transferring funds to a bank account in your business name rather than your personal name feels more legitimate to your clients and customers.
Frequently asked questions about side jobs
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If you're interested in starting a side hustle, first identify your skills, interests, and hobbies and see if there's a way you can turn them into a way to make money. You may want to consider using an app that helps you find a side hustle. Set aside some dedicated time each week to work on your side hustle and establish a routine. Once your side hustle starts to increase your expenses and income, you can take control of your finances by opening a business bank account.
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There is no one-size-fits-all method for side hustles. Instead, we recommend finding one that fits your specific interests and skill set. Check out some of the most popular side hustle ideas and consider which one appeals to you the most given your time and resources.
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Taking on a side hustle or taking on a job is a great way to save extra money. Other examples of ways to save money quickly include canceling subscriptions you don't need, selling unwanted items, and switching to a high-yield savings account.
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When organizing your small business's finances, start by creating a separate business bank account to track your income and expenses. Create a budget that outlines your expected expenses and revenue. Be sure to track all receipts and invoices and review your financial statements regularly. You may also consider consulting an accountant or financial advisor to ensure your business is tax compliant and maximize efficiency.
Note: Bankrate's Matthew Goldberg and Kat Tretina contributed to an earlier version of this article.
